Demystifying Endowments

Endowments are stocks of financial and real assets held by colleges and universities to generate income for current and future operations. Donors often place specific restrictions on the use of their gifts. An endowment’s portfolio must be allocated for long-run investment returns and also for short-term liquidity to meet cash flow needs, but this has proven challenging in the current economy. Historically, colleges and universities have sought to smooth the flow of endowment spending over time, but such policies never envisioned a decline in investment returns of the type the economy is now experiencing. Reductions in endowment spending invariably affect all operations of a college or university, not just the activities that are financed by the endowment. Large declines in endowments have led to budget cuts, salary freezes, cuts in employment levels, and slowing or stopping building projects throughout higher education; institutions that cover relatively large shares of their budgets from their endowments have been impacted more. There is a general lack of understanding regarding endowments—what they are, how they are used, how they are invested and the investments managed, how decisions are made regarding how much to spend from them, and why the reported declines in endowment values are having such profound effects on higher education. This paper addresses such issues.

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